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The Political Economy of Unilateral Trade Liberalization: The Case of Chile

  • Sebastian Edwards
  • Daniel Lederman

Chile has become a model for reforming economies throughout the world. The purpose of this paper is to analyze the political and economic circumstances surrounding Chile's unilateral trade liberalization during five stages (covering the period 1974-1990s),each being characterized by different combinations of compensation schemes that were used to raise support and reduce opposition to the reforms. In less than 4 years (1975-1979) Chile eliminated all quantitative restrictions and exchange controls and reduced import tariffs from an average in excess of 100% to a uniform 10% tariff. Later the tariff was temporarily raised to 35% in the aftermath of a severe economic crisis (1983-1984), but was then reduced to 11% by 1991. This liberalization was implemented simultaneously with other reforms, including an effort to eliminate a stubborn inflationary process, financial reforms that ended decades of financial repression, and a massive privatization program. We investigate the role played by ideas, interests and institutions. More specifically, we examine the role played by the 'reform team' investigate some of the distributive consequences of the reforms, and analyze the ways the government used to maintain a minimum level of support for the liberalization process. A recurrent question is whether authoritarian governments are sensitive to political considerations when implementing major policy changes. We also present econometric results obtained by using household-level survey data to analyze the effects of trade liberalization on Chile's unemployment. We conclude that during the 1970s and afterwards the Chilean authorities relied heavily on coalition building and on compensation mechanisms in order to increase the political support for the reforms.

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File URL: http://www.nber.org/papers/w6510.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6510.

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Date of creation: Apr 1998
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Publication status: published as in Jagdish Bhagwati (ed), "Going Alone: The Case for Relaxed Reciprocity in Freeing Trade." MIT Press, September 2002, pp. 337-3394.
Handle: RePEc:nbr:nberwo:6510
Note: ITI
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  1. Corbo, Vittorio, 1997. "Trade Reform and Uniform Import Tariffs: The Chilean Experience," American Economic Review, American Economic Association, vol. 87(2), pages 73-77, May.
  2. John Williamson, 1994. "The Political Economy of Policy Reform," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 68.
  3. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  4. Jere H. Behrman, 1976. "Foreign Trade Regimes and Economic Development: Chile," NBER Books, National Bureau of Economic Research, Inc, number behr76-1, 07.
  5. Rodrik, Dani, 1989. "Promises, Promises: Credible Policy Reform via Signalling," Economic Journal, Royal Economic Society, vol. 99(397), pages 756-72, September.
  6. McKinnon, Ronald I., 1982. "The order of economic liberalization: Lessons from Chile and Argentina," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 159-186, January.
  7. Bruno, Michael & Easterly, William, 1996. "Inflation's Children: Tales of Crises That Beget Reforms," American Economic Review, American Economic Association, vol. 86(2), pages 213-17, May.
  8. Dornbusch, Rudiger & Edwards, Sebastian, 1990. "Macroeconomic populism," Journal of Development Economics, Elsevier, vol. 32(2), pages 247-277, April.
  9. Dani Rodrik, 1992. "The Rush to Free Trade in the Developing World: Why So Late? Why Now? Will it Last?," NBER Working Papers 3947, National Bureau of Economic Research, Inc.
  10. Aaron Tornell, 1995. "Are Economic Crises Necessary for Trade Liberalization and Fiscal Reform? The Mexican Experience," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 53-76 National Bureau of Economic Research, Inc.
  11. Cesar Martinelli & Mariano Tommasi, 1993. "Sequencing of Economic Reforms in the Presence of Political Constraints," UCLA Economics Working Papers 701, UCLA Department of Economics.
  12. Cassing, James H & Hillman, Arye L, 1986. "Shifting Comparative Advantage and Senescent Industry Collapse," American Economic Review, American Economic Association, vol. 76(3), pages 516-23, June.
  13. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
  14. Edwards, Sebastian, 1997. "Trade Liberalization Reforms and the World Bank," American Economic Review, American Economic Association, vol. 87(2), pages 43-48, May.
  15. Sebastián Edwards & Alejandra Cox de Edwards, 1996. "Trade Liberalization and Unemployment: Policy Issues and Evidence from Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(99), pages 227-250.
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